2.1 Query
Appointment of tax auditor by a company u/s 44 AB of the Income-tax Act, 1961.
1. The Board of Directors of ABC Ltd., adopted the following resolution for appointing a chartered accountant to carry out the tax-audit u/s 44 AB of Income-tax Act, 1961:
“It was decided that the chartered accountant who does the internal audit of the accounts of the company may be assigned the job of performing the tax-audit u/s 44 AB of Income-tax Act, 1961 and the Managing Director is authorised to fix the remuneration payable for performing the tax audit of the Company”.
2. The querists have sought the opinion of the Expert Advisory Committee on the following issues arising out of the aforesaid resolution:
(a) Circular No. 29/76 dated 27.08.1976 of Company Law Board indicates that the internal auditor of a company is in the position of an employee of the management. (This circular was issued in the context of a doubt whether a statutory auditor under Companies Act, 1956, can also perform the internal audit of the same company). Therefore, in view of the aforesaid circular, are the Board of Directors permitted to appoint the internal auditor as tax auditor u/s 44 AB of Income-tax Act, 1961?
(b) Does the appointment of tax auditor u/s 44 AB of Income-tax Act 1961, valid without any reference to the financial year/assessment year for which the tax audit is to be performed and the period for which the appointee would hold office as tax auditor?
(c) Please clarify whether the acceptance of the appointment by the chartered accountant ( who is also performing the internal audit of the same company) would tantamount to professional misconduct within the meaning of the Chartered Accountants Act, 1949 and the regulations made thereunder?
(d) Does the appointment of a chartered accountant who does the internal audit of the same company satisfy the requirements envisaged u/s 44 AB of Income-tax Act, 1961?
(e) Can the Income-tax Department reject the tax audit report of the chartered accountant who does the internal audit of the company and conclude that the provisions of Section 44 AB of Income-tax Act, 1961 have not been complied with?
Opinion February 11, 1988
1. The Committee notes that Section 44 AB of the Income-tax 1961, provides as under:
“Every person –
(a) carrying on business shall, if his total sales turnover or gross receipts, as the case may be, in business exceed or exceeds forty lakhs rupees in any previous year or years relevant to the assessment year commencing on the 1st day of April, 1985, or any subsequent assessment year; or
(b) carrying on profession shall, if his gross receipts in profession exceed ten lakh rupees in any previous year or years relevant to the assessment year commencing on the 1st day of April, 1985, or any subsequent assessment year, get his accounts of such previous year or years audited by an accountant before the specified date and obtain before that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed:
Provided that in a case where such person is required by or under any other law to get his accounts audited it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such business or profession audited under such law before the specified date and obtains before that date the report of the auditors required under such other law and a further report in the form prescribed under this section.
Explanation – For the purposes of this section,
(i) “accountant” shall have the same meaning as in the explanation below sub-section (2) of Section 288;
(ii) “specified date”, in relation to the accounts of the previous year or years relevant to an assessment year, means the date of the expiry of four months from the end of the previous year, or where there is more than one previous year, from the end of the previous year which expired last before the commencement of the assessment year, or the 30th day of June of the assessment year, whichever is later”.
2. The Committee further notes that para 6.8 of the Guidance Note on Tax Audit under Section 44 AB of the Income-tax Act, issued by the Institute of Chartered Accountants of India, states as under:
“The Act does not prohibit a relative or an employee of the assessee being appointed as an auditor u/s 44 AB. It may, however, be noted that as per the decision of the Council (reported in the Code of Conduct under clause (4) of Part I of Second Schedule) a Chartered Accountant who is in employment of a concern or in any other concern under the same management cannot be appointed as auditor of that concern. Therefore, an employee of an assessee or of a concern under the same management cannot audit the accounts of the assessee u/s 44 AB. It may also be noted that under the Second Schedule to the Chartered Accountants Act if a member gives an audit report u/s 44 AB in the case of a concern in which he and/or his relatives have substantial interest it will be necessary for him to disclose his interest in the Audit Report.”
3. On the basis of the above, the opinion of the Expert Advisory Committee, on issues raised by the querists in para 2 of the query, is as below:
(a) The Committee notes that the Circular of the Company Law Board, referred to by the querist in para 2 (a) above, lays down the position of an internal auditor for the purpose of the statutory audit under the Companies Act, 1956. The Committee is, therefore, of the opinion that for the purpose of tax audit, a chartered accountant in practice providing internal audit services to the company (as professional services) is not in the position of an ‘employee’ of that company. In view of this, such a chartered accountant in practice or such a firm of chartered accountants, acting as internal auditor of the company, can be appointed as the tax auditor of the company.
(b) On a reading of section 44AB of the Act, it is apparent that the appointment of the tax auditor is a special purpose appointment with reference to the previous year(s) relevant to the assessment year. In view of the facts of the query the appointment of the tax auditor should be made with reference to the previous year(s) for which the audit is to be conducted. If this is not done, the proposed tax auditor shoud get this rectified before the acceptance of the assignment.
(c) If a chartered accountant, as referred to in (a) above, acting as an internal auditor, accepts the assignment of tax auditor of the company, he cannot be considered to have violated professional code of conduct, since the code of conduct of the Institute only prohibits the appointment of an employee of the company as an auditor.
(d) Section 44AB of the Income-tax Act does not prohibit appointment of an internal auditor of the company as its tax auditor.
(e) In view of the above, the ITO can accept the report on tax audit u/s 44 AB of the Act submitted by the internal auditor of the company.
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